Wednesday, August 10, 2011
Why I think things are not as bad as 8 days ago.
Anyone who has been following my comments for the past year knows that I have been warning about a sharp stock market and economic downturn for a while. The warnings go back to the midterm elections, which saw historic gains by the Republicans and most notably, lots of Tea Party candidates.
The fact that they embraced a set of very destructive beliefs--in fiscal austerity, dismantling of social safety nets, anti-environment, anti-labor, etc--made me feel that we would begin to head off in a new and dangerous direction.
In January of this year I released my 2011 Yearly Outlook and I predicted weakness in the second half and beyond. This was before Goldman, Morgan Stanley, JP Morgan Chase or anyone else.
I also spoke about the potential turbulence that could come about as a result of the debt ceiling debate and I even raised the possibility of a U.S. default. In addition I predicted that the rating agencies would downgrade the America's credit rating, and I said this going all the way back to 2007.
All of these things came true.
The question is, what now?
Unfortunately, I don't see a broad-based embrace of MMT or similar policies that would put us back on the right track. The Austerians remain firmly in charge both here and around the world. If anything, the movement in this direction has accelerated though I do admit that there has been a small bit of progress in getting the MMT message out thanks to our little community of dedicated believers, some of whom contribute to this blog.
The gloomy longer-term outlook aside, the market turmoil that we're seeing now just doesn't seem justified to me. The selling appears to be completely indiscriminate and utterly panicky, when it should be time to breath a sigh of relief.
That's right, I said breath a sigh of relief.
The reason I say this is because the storm may be over, at least for now. We got the debt ceiling increase and we got it with no concomitant cuts in spending, at least until 2013. That's good thing. If we hadn't got the debt ceiling increase the government would have been forced into operating in "balanced budget mode," meaning that $130 bln per month of income would have been sucked out of the economy.
By the same logic, the fact that we didn't get spending cuts is also good, because with the economy as weak as it is and with unemployment so high, spending cuts would have been a killer. At least we don't have to worry about this for the next two years and by then we could have a completely different government from top to bottom for all we know.
These are good outcomes and they are real--they're a reality at this moment.
But that's not the end of the story. Other good things have happened. We see oil prices 8-month lows and that will translate into lower gasoline prices at the pump. Consumers will see some much needed cost savings and they'll be able to use that extra money on other stuff instead of gas. Commodity prices in general have come down and that's a positive, too.
Bank lending is also finally starting to pick up. Total loans and leases at commercial banks are now at the highest level of the year, up some $100 bln from the March lows and loans outstanding are nearly positive on a year-over-year basis for the first time since the crisis began three years ago.
In addition, there is talk of a jobs stimulus and the president is also asking for an extension of the payroll tax cut. By the way, the payroll tax cut was a measure first recommended by the MMT community way back in 2008.
Finally, interest rates have fallen to historic low levels and that happened despite the idiotic and terribly misinformed downgrade issued by S&P. It hurt our pride as Americans to see that AAA go, but now it's done. We will do our mourning and get over it like any loss and then we will realize how stupid and immaterial the credit rating agencies are. What happened following the downgrade anyway? Bonds rallied and interest rates plummeted. That was the market expressing a huge, "no confidence" vote on S&P.
Maybe the best thing of all is that we see more and more of MMT getting out there in the blogs and being talked about, usually without attribution and usually coming under attack. But hey, bad publicity is still better than no publicity as they say. We'll take it and we'll defend ourselves. (And we do it intelligently and well!)
Bottom line, there is hope. Things are less bad than they were just a month ago. Actually, they're less bad than they were just 8 days ago. My outlook has shifted a bit and I don't think this wanton selling is justified. We may still be in the storm, but we've just entered a clear patch and I think that clear patch will persist for a while until the rest of the storm comes along. And maybe, just maybe, it'll pass us by.